CAPPS - Avocacy and Communication Professional Development

California Association of Private Postsecondary Schools

Don't Panic ... Yet

08/28/2012

Inside Higher Ed - August 27, 2012

College administrators are justifiably worried about whether they're going to be able to balance their budgets in a changing economic landscape, and a survey released by Sallie Mae last month didn't do much to put them at ease.

The report’s headline finding is that spending on colleges -- a number that includes parent and student income and savings, federal and private loans, grants and scholarships, and money from friends and relatives -- by traditional-aged students and their families dropped over the past two years, a 13 percent decrease between 2009-10 and 2011-12.

A 13 percent drop in spending across all institutions types would represent a dramatic shift in the market indicating that large numbers of students and families had chosen less-expensive institutions over costlier ones, opted to live at home instead of on campus, or made other choices that cut their own spending -- and, in turn, colleges' revenues. That is revenue that tuition-dependent institutions of all types would have a hard time replacing.

Prompted by the Sallie Mae study, Moody's Investors Service said in a July report that "[l]ower spending on U.S. colleges translates to slow net tuition growth, which is credit negative for colleges and universities because it impedes revenues. The impact varies across institutions, but it’s particularly acute for small- to mid-sized and moderately selective private colleges that are highly dependent on annual increases in tuition.”

Despite its headline-grabbing nature, the Sallie Mae survey doesn't paint quite as dramatic picture as it seems on first read. That's partly because the two-year drop begins after a large spike in spending in the 2009-10 school year that coincided with the recession. The study's findings are also tempered by other trends such as increases in college-going rates and shifts in who pays for college. While the findings of the Sallie Mae study still portend financial difficulties for some colleges in the years ahead, they don't signal quite the sea change that they seem to at first glance.

Not as Bad as You Think?

One reason why the Sallie Mae study stands out is because the decline in spending is hard to sync with other headline-grabbing trends in higher education, including an increase in spending on higher educationincreasing student loan debtincreasing tuition at public colleges and universities, and steady, but not dropping, net tuition revenue -- the amount colleges take in after discounts and aid -- at private colleges and universities.

While spending on higher education declined in the past two years, that drop appears worse because of a spike in 2009-10, when the average amount spent on college jumped from $19,432 to $24,097, according to the 2011 survey.

In 2009-10, at the height of the recession, states decreased spending on higher education to balance their own budgets, driving up tuition prices at public institutions. Endowment losses and constrained fund-raising drove administrators at private institutions to increase tuition.

Because the Sallie Mae survey includes scholarships and grants in its calculation of what families spent, the financial aid provided to families during that period is also a factor in the spike. Sandy Baum, a senior fellow at the George Washington University Graduate School of Education and Human Development and author of the College Board's "Trends in College Pricing" and "Trends in Student Aid" studies, said that since both grants and scholarships can come from institutions, the overall spending number can be misleading.

In all sectors, scholarships and grant aid increased, but not as quickly as overall tuition costs, according to the 2010 version of the Salle Mae survey. So several other sources of spending spiked in 2009-10, but have since returned to pre-recession levels, including home equity, parent income, private loans, credit cards, savings funds and other family savings. “Johnny was in college, and tuition was going up, so families can’t really do anything about that, so they really had to stretch,” said Clifford Young, managing director of Ipsos Public Affairs' polling and public sector practice in the U.S., which conducted the Sallie Mae survey. “Families and students went to the piggy bank and were ultimately able to cover expenses.” Young said the data over the past three years reflect the kind of coping behavior expected from families during an economic downturn – stretching in the first few years followed by changes in decision-making.

The spike in 2009-10, and a following year of elevated spending in 2010-11, makes this year’s finding appear more dramatic than it really was. In the long term, average spending on college is still up an average of almost $1,500 from 2008-09, the last year before the recession, according to the 2011 survey.

Young and Sarah Ducich, senior vice president for public policy at Sallie Mae, said the peak in 2009-10 might represent an unsustainable level of cost for students and parents, since it was not maintained in the following years, which could influence some colleges' decision to announce lower tuition hikes in the past three years than before the recession.

Since 2009-10, spending from grants has increased in all sectors, according to the surveys.

Another finding tempering the impact of the 13 percent decrease in spending is that the percentage of students attending various types of institutions has changed. In 2008-9 version of the survey, 23 percent of respondents attended two-year public institutions. In the 2011-12 survey, that number had risen to 29 percent.

What the Sallie Mae survey cannot tease out is how much of the shift in community college enrollment in attributable to students who might otherwise go to more-expensive schools and how much is attributable to new students entering the higher education market. In other words, it's not clear whether students shifting from more expensive four-year institutions to less expensive two-year institutions helped drive the decrease in college spending or whether an influx of new students enrolling in two-year institutions -- while other institutions continued to see similar enrollments -- lowered the average amount students were spending and made this drop look bigger.

Observers say it is likely a mix of the two trends. In a different economic climate, they say, some of these individuals might have attended four-year public or private institutions. “As new groups enter the population, new students and families, they’re making different sorts of decisions,” Ducich said. “Some are going to two-year colleges. They change behavior when they can. That doesn’t say anything about the aggregate sorts of trends.”

At the same time, more people are pursuing college degrees than ever before, thanks in large part to the recession. Enrollment in colleges and universities grew 7 percent between fall 2008 and fall 2009, according to a federal study, and much of that growth was at community colleges, typically the lowest-price option.

Because the Sallie Mae survey includes grant and scholarship dollars in family spending, and because it includes all college spending, not just tuition, room, board, and fees, it is hard to compare with other surveys of student spending such as the College Board’s Trends in College Pricing report, released in October.

The 2011 version of the College Board report found that net price – how much students spend on tuition room, board, and other fees after financial aid is considered – increased $450 between 2006-07 and 2011-12. At public four-year institutions, net price increased $1,250 over that period, and at public two-year institutions net price actually dropped $690.

Private Concerns

One of the most worrisome findings for higher education leaders is the fact that students who attend private universities actually spent less for education this year than they did four years ago. The 2008-9 version of the Sallie survey found that families spent a total of $38,651 on college costs that year. The 2011-12 survey found that families were spending an average of $34,532 at private four-year institutions, a drop of about 11 percent.

The cause of that drop is unclear in the survey, but responses to other questions suggest several possible reasons. Over the course of the past four surveys, parents decreased the amount they spent on higher education from their current incomes, savings and investments. The amount they spent from income dropped from $8,373 in 2008-9 to $5,541 in 2011-12; spending from “other savings and investments” dropped from $2,378 to $897 over the same period.

“For some institutions, particularly not-for-profit institutions with a more regional draw, they’re seeing fewer applications, an increase institutionally funded financial aid, and are doing those sorts of things to get their incoming class,” said Jessica Matsumori, a credit analyst with Standard & Poor’s.

Since the Sallie Mae survey takes into account loans, grants and scholarships, the drop in spending on private higher education can't be explained by an increased in federal or institutional aid.

This spending shift is part of the reason why Moody’s gave colleges and universities outside of the elite tier a negative outlook in its midyear report. “Increased price sensitivity since the financial crisis continues to impede all but the best known and least expensive U.S. colleges’ ability to attract students without increasing financial aid,” the report states. At the same time, however, the Sallie Mae survey has shown an increase in the percentage of respondents in private four-year institutions every year since 2008, rising from 19 percent then to 23 percent in the 2011-12 survey.

Private-sector administrators said that, by and large, they haven't seen the kind of problems that reports predict. Tony Pals, director of communication for the National Association of Independent Colleges and Universities, said administrators at private, not-for-profit institutions have worked hard over the past few years to keep out-of-pocket costs down, meaning students and families might be spending less overall, but not necessarily on tuition. "A few years ago, when the financial crisis hit, the doomsayers predicted an exodus of students from private institutions and an imminent wave of closings," he said. "However, sector enrollment has remained steady, and there has been no significant jump in closings or mergers."

Public Sector Problems

In the public sector, students at two- and four-year institutions are actually spending more than they did four years ago, and four-year publics actually saw an increase in spending over last year as well.

But within the sector students are seeing their money come from different sources than in the past. Students at both two-year and four-year institutions are getting a lot more money in federal student loans and grants, while they are getting less help from their parents’ savings and investments and are spending less of their own current income.

That trend doesn’t bode well for concerns about increasing student loan burdens, and also could be problematic for institutions if states and the federal government cuts back on loans and grant aid.

But the overall increase could be positive news for public universities that, unlike their private counterparts, might have market -- if not political -- room to increase tuition on their students. They just have to be able to attract those students and prove that the investment is worth it.

Smarter Shopping

The theme throughout the Sallie Mae survey is that families and students are being more cost-conscious when making decisions about colleges and universities.

The survey makes it clear that families see college as a worthwhile pursuit. The percentage of students and parents who said a college degree is “needed for desired occupation” or to “earn more money” is higher than four years ago, as is the number of students who said they were “willing to stretch financially, “who would “rather borrow than not go,” and who see college as an “investment in the future” On the last three questions, however, the number of parents who answered affirmatively has dropped from four years ago, potentially explaining some of the decrease in financial support from parents.

Ducich and Young said these findings represent a tremendous opportunity for colleges that can demonstrate the “value proposition” of why paying high tuition is worth it. At the same time, however, “cost is creeping into the equation,” Ducich said.

The 2012 survey found that families are more likely to rule out a college based on cost at some point in the application process, with 69 percent of families ruling out a college after learning about financial aid, compared to 56 percent in 2008.

What the survey can’t tease out is whether the savings seen at private four-year institutions come from tuition or whether students and their families are cutting costs elsewhere – housing, food, other expenses – to limit their spending. The survey suggests that families were taking measures, such as adding roommates and living at home, to keep costs down without decreasing tuition payments. “Families and students aren’t just necessarily selecting cheaper schools,” Young said. “They’re employing a whole host of strategies to reduce costs. The survey covers all costs and doesn’t necessarily mean they’re spending less at school.”